BOSTON — MFS Investment Management is moving to fill the product and distribution gaps that left parent company Sun Life Financial Inc., Toronto, mulling a transformational deal recently for its Boston-based subsidiary.
Among other moves, MFS — which reported record assets under management of $175 billion as of Sept. 30 — will seek to reverse stubborn mutual fund outflows by opening up its U.S. retail distribution network to third-party products, while adding a new investment office in Australia.
In an interview, MFS Chief Executive Officer Robert Manning said his firm dodged a bullet last month when Sun Life abruptly ended the search it announced in September for someone to partner with MFS. At the end of the exercise, Sun Life gained a new appreciation for the strength of the MFS platform, agreeing none of the half dozen potential partners MFS had identified offered strong enough synergies to justify the "execution risk" of a merger, Mr. Manning said.
The three things Sun Life and MFS executives agreed to look for in a partner were:
• additional products for MFS' U.S. retail platform, where subpar performance in areas such as growth equity have hindered inflows;
• a more mature offshore distribution network to leverage MFS' strong suite of international and global strategies; and
• scale, from combining two large organizations.
No candidate offered all three, and the potentially destabilizing impact of a big merger on MFS' culture "was scary, frightening," Mr. Manning said.
Mr. Manning disagreed with an investment banker's prediction that Sun Life will remain open to bids for MFS. The recent decision not to pursue a deal is a "complete conclusion," he said. Roughly 130 MFS employees own 22% of the money management firm's equity.
While MFS news in recent years has focused on its continued mutual fund outflows, the organization has quietly diversified, with institutional wins for the firm's strong international equity, global equity and fixed-income strategies more than offsetting those outflows, Mr. Manning said.
The firm's third-quarter results showed institutional strategies — not counting insurance-related — more than tripled to 31% of assets under management, from 9% in 2000. U.S. retail mutual funds, meanwhile, tumbled to 43% of assets from 64%.
During that same period, assets in global and international equity strategies surged to 37% of the firm's total assets under management from 4%, a jump to $60 billion from $5 billion. Fixed income, meanwhile, rose to 21% from 6% of total assets, as U.S. equity slumped to 27% of assets from 84%.
Because international/global strategies garner higher management fees than many of the firm's traditional domestic equity mutual funds, continued flows to those products have contributed to the recent pickup in MFS' pre-tax margins, to 30%, from 22% in 2005, he said.
MFS continues to strengthen the firm's global network, and executives expect that business to drive growth at the firm. In the first quarter of 2007, MFS will open up an investment office in , Australia, while adding "sales people, investment people and client service people" to existing offices in other countries, Mr. Manning said.
Also in the first quarter of 2007, MFS will launch the first of several planned fund adoptions — the core equity MFS Sector Rotational Fund, subadvised by Valley Forge Capital Advisors Inc., a Malvern, Pa.-based quantitative money management shop — as one means of "getting our flows turned around," Mr. Manning said.
According to the latest data from Financial Research Corp., Boston, outflows of $527 million from MFS mutual funds in September lifted year-to-date outflows to $4.5 billion.
Growth equity will be another area for potential fund adoptions. MFS growth equity managers — such as Steve Pesek, lead manager of the $6.1 billion Massachusetts Investors Growth Stock fund — are doing a good job in turning performance around, and "we believe in our people," Mr. Manning said. Still, it takes time to rebuild track records, he noted.
"We're going to make our investment people compete not only against themselves internally, but against the outside world, " he said.
That competition strategy carries risks: "What do you do to the morale of your own people?" asked Geoff Bobroff, president of Bobroff Consulting Inc., an East Greenwich, R.I.-based money management consultant.
Mr. Manning conceded hiring subadvisers could be "a cultural shock to some people here," but giving the firm's distributors the product they need to get into positive flows is imperative, he said.
It won't be the first time the 23-year MFS veteran has tweaked the culture since becoming CEO three years ago. "One of the things we have done is put a little bit (more) of a performance-driven edge on the culture," he said.
"We're not quite as insular as we used to be," and if somebody can't add value to client portfolios, "we cannot keep them here," Mr. Manning said. It's a "tough love" message that can work as long as everyone believes it's fair, he said.
